1. What is Short Rate Cancellation?

Short rate cancellation is a method used in insurance to calculate the earned premium when a policy is cancelled before its expiration date. This method typically results in the insurer retaining a higher portion of the premium compared to pro-rata cancellation.

2. How Does the Calculator Work?

The calculator uses the short rate cancellation formula:

Where:

• \( \text{Premium} \) — Original policy premium amount in dollars
• \( \text{Factor from Table} \) — Short rate factor determined by the time elapsed (dimensionless)

Explanation: The short rate factor is typically obtained from insurance industry tables and represents the percentage of premium the insurer is entitled to keep based on how much of the policy period has elapsed.

3. Importance of Short Rate Calculation

Details: Accurate short rate calculation is crucial for insurance companies to properly account for earned premiums when policies are cancelled mid-term, ensuring fair financial reporting and compliance with insurance regulations.

4. Using the Calculator

Tips: Enter the original premium amount in dollars and the appropriate short rate factor from your insurance table. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between short rate and pro-rata cancellation?
A: Short rate cancellation allows the insurer to retain a higher percentage of the premium than pro-rata, which refunds the exact unearned portion.

Q2: How are short rate factors determined?
A: Short rate factors are typically established by insurance regulators and vary based on the time elapsed in the policy period.

Q3: When is short rate cancellation typically used?
A: Short rate cancellation is often used when the policyholder initiates cancellation or when cancellation is due to non-payment of premium.

Q4: Are short rate factors the same for all types of insurance?
A: No, short rate factors can vary by insurance type and are often regulated by state insurance departments.

Q5: Can short rate cancellation be negotiated?
A: In some cases, short rate provisions may be negotiable in commercial insurance policies, but they are typically standard in personal lines policies.